Litigation funding bill proposed to reverse UK PACCAR ruling

Emilie Jones and Paul Abbott of Pinsent Masons said the Litigation Funding Agreements (Enforceability) Bill, introduced in the House of Lords on 19 March, is the legislation the UK government promised to publish to reverse the impact of the UK Supreme Court’s so-called PACCAR decision on third party litigation funding agreements, from July 2023. 

The Supreme Court held that third party litigation funding agreements (LFAs) which provide for the funder to receive a fee calculated by reference to the damages achieved by the funded claimant were damages-based agreements (DBAs). This had the effect that such LFAs, which included many LFAs then in place in the market, were completely unenforceable in opt-out collective proceedings before the UK’s Competition Appeal Tribunal (CAT); and unenforceable in other matters unless they complied with requirements set out in the DBA Regulations 2013, which many LFAs did not.

Since the PACCAR decision, the litigation funding market has argued for legislation to reverse its effects. Initially, it appeared that the issue might be addressed, to some extent at least, through the addition of clauses to an existing Bill currently going through parliament, the Digital Markets, Competition and Consumers Bill (DMCC Bill). However, the government recently announced that there would be separate legislation to reverse the effects of PACCAR.

Abbott said: “The litigation funding community will welcome the speed with which the government has acted to introduce legislation to reverse the impact of PACCAR.”

“If passed, this legislation will effectively restore the pre-PACCAR status quo as to the enforceability of LFAs, regardless of when any LFA was entered into. Some funders have been preparing for this eventuality by drafting their LFAs to provide for the funder’s fee to be calculated on two alternative bases: a ‘PACCAR-compliant’ basis such as by reference to the funder’s outlay on legal costs; or, if once again permitted by law, the sort of damages-based measure which has fallen foul of PACCAR. Such LFA clauses have met with some judicial approval and may prove valuable to funders if this Bill becomes law,” he said.

The Litigation Funding Agreements (Enforceability) Bill provides for the statutory definition of a DBA to expressly exclude LFAs. A LFA is itself then defined in the Bill. 

The definition of a LFA given is an agreement under which an entity providing claims management services, as the Supreme Court in the PACCAR case held litigation funders do, agrees to fund the provision to a litigant, by someone other than the funder, of advocacy or litigation services, or to fund the payment of any adverse costs order made against that litigant; and the litigant is to pay the funder a fee as set out in the agreement.

The Bill provides that these provisions will be treated as having always had effect. They will therefore apply to LFAs entered into before any Act comes into force, including LFAs entered into in the period since the PACCAR decision.

The Bill is silent on other issues relating to third party litigation funding, including whether the market should be subject to greater safeguards. 

During recent House of Lords scrutiny of the DMCC Bill, an amendment was proposed to require the government to conduct a review of the litigation funding market and its regulation. This amendment was rejected, but the government explained during debate that it was “not blind to some of the challenges and opportunities to reform and improve the funding system”. The Lord Chancellor has therefore commissioned a review of the sector by the Civil Justice Council. The review will “expressly consider the need for further regulation or safeguards”, according to Lord Offord of Garvel, a government minister for business, speaking in the debate.

Jones said: “The passage of this new Bill through parliament remains to be seen, including how quickly it progresses, whether it meets with objections, and whether it is subject to any amendment. In the meantime, those interested in this area – whether funders, funded or potentially funded claimants, or defendants who are facing or may face funded claims – will be watching closely the progress of the proposed Civil Justice Council review of the litigation funding market.”

“The regulation of and parameters around litigation funding is a hot topic globally, including in Europe where the European Law Institute is leading a project to develop ‘principles containing safeguards in order to provide an environment in which [third party litigation funding] is allowed but balances the availability of the tool with the interests of claimants and defendants and a healthy litigation market’,” she said.